Monthly Archives: April 2024

ALR 2023 - 2024

Wrongful Death Claims Under Decedent-Signed Arbitration Agreements

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By

Kristiana Stiles

On December 8, 2023, an Illinois appeals court judge held that a plaintiff’s wrongful death claim on behalf of her son was required to be arbitrated under the arbitration agreement that her son signed.1 This ruling showcases the interaction between decedent-signed arbitration agreements and wrongful death claims brought by survivors. As shown by this case, arbitration agreements can be binding after the death, even murder, of the signee.2

Christine White, the plaintiff in White v. Wright, sued Uber for the death of her son, Joseph Schelstraete.3 Schelstraete was an Uber driver who was murdered by an individual using a fake Uber account that had planned to rob him.4 The defendants moved to compel arbitration under the arbitration clause that Schelstraete had been required to agree to in order to register and work as an Uber driver.5 The circuit court partially granted Uber’s motion but specifically denied it for White’s wrongful death claims.6

According to the plaintiff, the area where Schelstraete was murdered was already known to be dangerous. Approximately three weeks before Schelstraete’s murder, a different “rideshare diver” had been carjacked.7 Within the three months before that, an additional two rideshare drivers were shot.8 All of these incidents took place within a five-mile radius of Schelstraete’s murder.9 Based upon that and previous issues regarding fake profile use, White claimed that the defendants “knew or should have known that individuals using fake profiles were likely to commit violent crimes against drivers.”10 Alongside that allegation, White accused Uber of negligence due to failure to use reasonable care in the design and use of its application, which resulted in the murder of White’s son.11

At the appeals court, the issue came down to a conflict of laws discussion. According to Uber, the agreement that Schelstraete signed had a choice-of-law provision that selected Indiana law.12 Plaintiff argued that Illinois law should apply because Schelstraete’s children, who would receive the benefits from the wrongful death claim, had neither signed an arbitration agreement nor a choice of law provision.13

The appeals court compared Indiana and Illinois law on whether an arbitration agreement could bind plaintiffs in a wrongful death claim after the agreement signee’s death.14 Under Illinois law, precedent stated that a wrongful death claim operated outside of the arbitration agreement signed by the decedent because wrongful death claims are not “on behalf of the decedent.”15 Conversely, Indiana law required that wrongful death claims could only be brought if the decedent would have been able to bring them on their own behalf (if they had survived).16 Therefore, the arbitration agreement would only apply if Indiana law was found to be governing law.17 Following a final analysis of the state laws and public policy, the court concluded that Indiana law applied.18

Potential plaintiffs should be aware of the binding nature of arbitration agreements and the importance of choice of law provisions. This case makes clear the significant effect that different state laws can have on a potential wrongful death claim. White v. Wright also clarifies how a decedent’s actions and signature can potentially bind their survivors and beneficiaries.

  1. See White v. Wright, 2023 Ill. App. Unpub. LEXIS 1975 (Ill. App. Ct. December 8, 2023) at *1-2. ↩
  2. See id. ↩
  3. See id. at *1. ↩
  4. See id. at *3-4. ↩
  5. See id. at *1-2. ↩
  6. See White v. Wright, 2023 Ill. App. Unpub. LEXIS 1975 at *2. ↩
  7. See id. at *4. ↩
  8. See id. ↩
  9. See id. ↩
  10. Id. at *4-5. ↩
  11. See White v. Wright, 2023 Ill. App. Unpub. LEXIS 1975 at *5. ↩
  12. See id. at *5-6. ↩
  13. See id. at *7. ↩
  14. See id. at *9-10. ↩
  15. Id. at *10. ↩
  16. See White v. Wright, 2023 Ill. App. Unpub. LEXIS 1975 at *11. ↩
  17. See id. at *14. ↩
  18. See id. at *15-17. ↩
ALR 2023 - 2024

The Dangers of Intellectual Property Carveouts in Arbitration

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By

Austin Robinson

Intellectual property disputes present a unique challenge for arbitrators and litigators due to the intangibility of these property rights. These rights’ scope varies by jurisdiction.1 This leads to unpredictability in resolving any disputes. To combat this, many parties add carve-outs for IP disputes when entering into arbitration agreements.2 Despite this common practice, the negative policy implications of utilizing IP carveouts far outweigh the benefits. Instead of IP carveouts, submitting these disputes to arbitration will result in increased efficiency and decreased monetary burden.

Generally, carve-outs within an arbitration clause/agreement reserve a specific subject matter or type of relief for litigation in a specified jurisdiction.3 A typical carve-out clause reads as follows:

“Any dispute arising out of or related to this Agreement shall be submitted to binding arbitration under the [specified rules (the ‘Rules’)] to be heard by a sole arbitrator appointed in accordance with the Rules, except for those causes of action brought in connection with the ownership or right to use [specified intellectual property] which shall be submitted to the exclusive jurisdiction of the courts of [specified jurisdiction].”4

Parties elect to use carve-outs because IP protection varies by jurisdiction.5 Even in jurisdictions that allow IP litigation, some limit the binding effect of the award.6 People tend to opt to litigate these disputes because it offers greater discovery and a formal appellate review process.7 The fear of the unknown, likely lengthy appellate proceedings alongside unfamiliar, jurisdiction-specific legal actions, like, for example, the U.S.’s claim construction hearings, may prompt the parties to include such carve-out language for security reasons.8

Despite these valid concerns, these clauses have backfired in recent court decisions.9 For example, in LAVVAN v. Amyris a similar carve-out formed the core of the dispute.10 The Second Circuit upheld the IP carve-out, but supervening contractual deficiencies forced the parties into two separate proceedings: one litigated, one arbitrated.11 Concurrently litigating the patent infringement claim and arbitrating the breach of contract claim likely imposed greater costs and delays on than litigating both disputes, let alone arbitrating them.12 Even if drafted meticulously, these carve-outs can create additional burdens for the parties to the arbitration agreement.13

The aforementioned burdens are reinforced by the benefits that arbitrating IP disputes offers. Unlike litigation, arbitration offers parties control over who adjudicates their dispute, allowing them to select those with relevant training, education, and expertise.14 Decision-makers with some degree of knowledge and/or background in the area of the dispute are more equipped to handle arguments centering on patent validity and infringement. Specifically in patent disputes, relevant expertise in the invention’s field eliminates the need for extensive (and often expensive) expert testimony and background information – a common feature of litigation – and may allow the arbitrator(s) to reach a decision faster. Finally, an arbitrator who understands how an invention works and its monetary value is more likely to reach a just decision and enforceable arbitral award.

Cost is a critical consideration parties must make when deciding whether to arbitrate or litigate IP disputes.15 Parties using carve-outs run the risk of concurrent litigation and arbitration, as seen in LAVVAN v. Amyris, something more time-consuming and costly than a single proceeding.16 Prosecuting a patent is a time and cost-intensive process with filing fees, attorney costs, and an average of one-to-two years spent prosecuting.17 Arbitrating subsequent disputes could save the holder money by limiting their exposure to litigation expenses and locking in a speedier resolution method. Further, patent litigation usually has a multi-jurisdictional impact, forcing patent holders to litigate in each respective court.18 Arbitration, on the other hand, allows for a single proceeding, saving the parties time and money.19

In arbitration, IP carve-outs carry significant risks. Generally, they hinge on perfect interpretation and when they go wrong they can force parties into a bifurcated dispute. The reasoning behind this trend of including IP carve outs stems from the desire for a predictable judicial process, from the discovery stage to appellate review. But the effect of these carve outs is far from predictable and tend to result in side-by-side litigation and arbitration in addition to an increased amount of time and money spent on the dispute(s). Rather than take the risk and miss out on the benefits of arbitrating their IP disputes, patent holders should focus on choosing a favorable governing law and seat of arbitration when concerned about potential IP-related disputes. Carve-outs should be avoided in IP arbitration to ensure efficiency and lower costs for the parties to the dispute.

  1. Rachel Thorn, Drafting Arbitration Clauses in IP Agreements, GLOBAL ARBITRATION REVIEW, (Dec. 21, 2022), https://globalarbitrationreview.com/guide/the-guide-ip-arbitration/second-edition/article/drafting-arbitration-clauses-in-ip-agreements. ↩
  2. See id. ↩
  3. Nathan O’Malley, Mastering the Litigation Carve-Out, USC GOULD SCHOOL OF LAW, (Sep. 24, 2020), https://gould.usc.edu/news/mastering-the-litigation-carve-out/. ↩
  4. See id. ↩
  5. See Rachel Thorn, supra note 1. ↩
  6. See id. ↩
  7. Marc Labgold & Megan Labgold, Should I Arbitrate My Patent Dispute?, KLUWER ARBITRATION BLOG, WOLTERS KLUWER, (Nov. 29, 2022), https://arbitrationblog.kluwerarbitration.com/2022/11/29/should-i-arbitrate-my-patent-dispute/. ↩
  8. See id. ↩
  9. See id. ↩
  10. LAVVAN, Inc. v. Amyris, Inc., No. 21-1819, 2022 WL 4241192 (2d Cir. Sept. 15, 2022). ↩
  11. See id. at 3. ↩
  12. See Marc Labgold & Megan Labgold, supra note 7. ↩
  13. See LAVVAN, Inc. v. Amyris, Inc., supra note 10. ↩
  14. See Marc Labgold & Megan Labgold, supra note 7. ↩
  15. See id. ↩
  16. See LAVVAN, Inc. v. Amyris, Inc., supra note 10. ↩
  17. What Happens After a Patent Application Is Filed in the U.S.?, NUTTER MCCLENNEN & FISH LLP, (May 20, 2021), https://www.nutter.com/ip-law-bulletin/nutter-patent-basics-part-1-what-happens. ↩
  18. See Marc Labgold & Megan Labgold, supra note 7. ↩
  19. See id. ↩
ALR 2023 - 2024

In Payne? Can’t Pay? The Eleventh Circuit’s Paradoxical Standard for Loser-pays Arbitration Provisions

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By

Ava McCartin

Under the Federal Arbitration Act (“FAA”), United States courts will uphold and enforce arbitration agreements unless they are voidable under contract law.1 While not specifically stated in the FAA, the doctrine of “effective vindication” empowers courts to void what would otherwise be facially valid arbitration agreements when the agreement would preclude a party from effectively vindicating their legal claims.2 When bringing an effective vindication claim, claimants primarily argue that the cost associated with arbitration bars effective vindication of legal rights.

In 2013, the Supreme Court addressed this judicially crafted doctrine directly in American Express Co. v. Italian Colors.3 In Italian Colors, the court recognized the doctrine as a valid exception to the general mandate of the FAA but declined to apply it in that particular instance.4 However, the court explained that a party could “certainly” rely on effective vindication to escape an arbitration provision where the agreement forbade asserting a statutory right in any forum, and possibly where filing and administrative fees were high enough to preclude a party from accessing the forum.5 But what if the administrative fees are uncertain or premised on losing on the merits?

In Payne v. Savanah College of Art and Design, the Eleventh Circuit was faced with those very issues.6 Payne concerned an arbitration provision in an employment contract, which Payne—the employee—sought to avoid under the doctrine of effective vindication.7 In Payne, the would-be-litigant argued that the agreement’s “loser pays” provision was unconscionable because if he were to lose at arbitration he would not be able to pay the arbitrator’s bill.8 To support this claim, Payne provided expert testimony that predicted the cost of arbitration could be up to $39,000 or more, declarations about his inability to pay, and testimony from another former SCAD employee who explained that “the risk of paying significant arbitration costs discouraged him from continuing [to pursue] his discrimination case against SCAD.”9 The risk of financial ruin, Payne argued, prevented him from effectively vindicating his statutory right to be free from racial discrimination.10 The Eleventh Circuit disagreed.

Because the employer would pay the cost up-front, the court distinguished this situation from the hypotheticals in Italian Colors, where fees were required as a threshold matter to initiate arbitration.11 Unlike threshold costs, which will certainly be incurred, the costs in Payne were “speculative.” The court reasoned that the only way Payne could prevail with his effective vindication argument would be if he could show that he would be “likely” to pay.12 But the only way that Payne would be likely to pay would be if he were “likely” to lose on the merits of his case. “The ‘problem,’” the court explained “is that [Payne] might win.”13 This standard is unworkable.

When costs are assigned only to a losing party, the Eleventh Circuit’s standard essentially forces a party to admit that their case lacks merit as a prerequisite to bringing forth the effective vindication doctrine. But even if a party believes that they have a sound case, as they should to initiate litigation, the fear of losing at arbitration and subsequently going bankrupt could still deter that party from arbitration. And in fact, that scenario is exactly what happened to Darnell Holcomb, another former SCAD employee whose testimony Payne introduced in his case.

Like Payne, Holcomb was fired from his position at SCAD, attempted to sue, but “the risk of paying significant arbitration costs discouraged him from continuing his discrimination case against SCAD.”14 By creating a loser-pays cost shifting agreement, SCAD effectively forces employees to gamble on their legal claims: the employee must either proceed with arbitration and risk footing tens of thousands of dollars in fees, or drop the claim entirely. But how much money are litigants forced to gamble with? Could an arbitration agreement impose a one-million-dollar fee on the losing party? Under Eleventh Circuit precedent, unless a party could show they would be likely to lose that case, the answer seems to be “yes.”

To remedy this paradoxical standard, legislative intervention is required. Congress should codify a clear effective vindication doctrine in the FAA itself that considers both front and back-end costs of arbitration. A workable standard should ask whether the certain and uncertain costs of arbitration would deter a reasonable person in the plaintiff’s position from pursuing claims in the arbitral forum. In doing so, Congress could end the judicial interpretation of the doctrine of effective vindication, close this cost shifting contract loophole, and better serve the pursuit of justice for Payne and other plaintiffs like him.

  1. 9 U.S.C.A. § 2. ↩
  2. Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 235 (2013). ↩
  3. Id. ↩
  4. Id. ↩
  5. Id. at 236. ↩
  6. Payne v. Savannah Coll. of Art & Design, Inc., 81 F.4th 1187, 1190 (11th Cir. 2023). The relevant facts of Payne are as follows: Payne was a fishing coach for SCAD. SCAD fired Payne from his job and he subsequently brought suit for racial discrimination and retaliation. SCAD moved to dismiss and settle the case in arbitration and Payne opposed. ↩
  7. Id. ↩
  8. Id. at 1192. (“In making his/her award, the arbitrator shall require the non-prevailing party to bear the cost of the arbitrator’s fees, provided however, that SCAD will advance the cost of the arbitrator’s fees at the initiation of the arbitration, subject to reimbursement by the employee following arbitration if the employee does not prevail.”) ↩
  9. Id. ↩
  10. Id. ↩
  11. Id. at 1195. ↩
  12. Id. at 1196-97. ↩
  13. Id. at 1197. ↩
  14. Id. at 1191. ↩